By Jinjoo Lee

Fuel station operator TravelCenters of America is seemingly at a happy crossroads: Not only has oil supermajor BP agreed to buy it for a healthy premium, but a second suitor has emerged with an even higher offer price and bigger sweeteners. TravelCenters, though, wants to stick with BP's lower bid. Depending on whom you ask, it is either playing it safe or catering to one conflicted shareholder, shortchanging the majority.

On Feb. 16, BP announced that it had reached an agreement to buy TravelCenters of America for $86 a share, a 74% premium to its undisturbed price. About a month later, fuel station operator ARKO emerged with an unsolicited rival bid of $92 a share. TravelCenters has rebuffed it, urging shareholders to approve the BP acquisition. Investors will get to vote on the matter on May 10, according to TravelCenters' proxy filed on Monday.

Markets certainly aren't treating BP's bid as a done deal. TravelCenters shares, which had been trading at least a dollar below BP's acquisition price since the announcement, have mostly fetched a premium since March 23, the day after TravelCenters disclosed in a filing that it had received the higher offer. Buyers might be able to profitably bet on that higher offer prevailing, but they won't get to sway the outcome: Investors who bought the stock after March 23 don't get to vote on the matter.

TravelCenters is rejecting ARKO's bid for two primary reasons. One is that it hasn't yet proven that it has the cash to close the deal, introducing execution risk. ARKO does have an existing agreement with private equity real-estate firm Oak Street Real Estate Capital that was amended to include an up to $1.25 billion financing for the TravelCenters acquisition, but that falls short for now of being a firm financing commitment as understood by mergers and acquisitions professionals.

TravelCenters' second objection is a little more interesting: It says that its landlord and shareholder SVC prefers a buyer with an investment-grade credit rating. ARKO's B+ rating falls four notches below that. To proceed with an acquisition, TravelCenters says it requires the consent of SVC. The buyer's creditworthiness is "of paramount importance to SVC," according to TravelCenters' proxy statement on Monday. As part of the deal, BP offered to prepay $188 million worth of lease payments to SVC.

Those deal terms make a lot of sense for SVC, a real-estate investment trust that is a landlord to most of TravelCenters' properties. SVC and its manager RMR Group also collectively own about 12% of TravelCenters shares. They have both said they would vote for BP's proposal.

For shareholders that aren't SVC or RMR, though, the lease prepayment doesn't matter, and neither does the buyer's credit rating -- they will walk away with cash regardless. All else being equal, only price does.

ARKO and TravelCenters' hostile back-and-forth news releases notwithstanding, ARKO needs to go at least one step further and provide a firm financing commitment. That would make it difficult for TravelCenters to shut ARKO out of discussions and its data room. And if discussions do start between the two companies, TravelCenters might have to push harder against the constraints that SVC has put on the potential acquirer. If not, it will be hard to shake off the appearance that it is only looking after some of its shareholders' interests.

ARKO also recognizes SVC's influence. The company has offered SVC-specific sweeteners to offset credit risk concerns: It offered to prepay a higher amount of lease payments upfront ($202 million). It is also open to facilitating discussions with another investor that could buy a portion of the SVC-owned real estate, which would then be leased back to ARKO.

If ARKO's financing firms up, allowing TravelCenters' landlord to block consideration of its higher bid could give new meaning to the phrase "rent-seeking behavior."

Write to Jinjoo Lee at jinjoo.lee@wsj.com

(END) Dow Jones Newswires

April 06, 2023 07:00 ET (11:00 GMT)

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